Master Services Agreement (MSA)

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What’s a Master Services Agreement?
A master services agreement is a type of contract in which one party is providing services to another party.

Why “master”?
It’s called a “master” agreement because typically, the agreement is designed to allow the addition of multiple different types of services to the agreement itself. So it’s modular in nature. These services are often present and defined in what’s called a schedule, an appendix, an exhibit, or a statement of work (SOW) to the agreement – think of this as attachments to the main agreement itself that serve a specific, narrow purpose. These attachments describe the actual service, oftentimes in great detail, that’s going to be provided.

Why “services”?
The reason it’s called a “services” agreement is simply because you’re providing services as opposed to goods. Services agreements in the context of a software company are probably most commonly designed to facilitate the provision of implementation services for SaaS or for on-prem software. So, what happens is, oftentimes the software seller, after they sell it to you, they will sell you services around it to get it set up initially. Perhaps do some data entry, perhaps to do some initial configuration of the software, and perhaps to do some training as well.

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What are the 2 primary types of Master Services Agreements?
Master services agreements, on the commercial side of things, come in two different flavors. Essentially there’s what’s called a “Time-and-Materials Agreement,” which is where the seller is essentially just charging by the hour. They might have a team of different people and each of those people is a specialist and does a different thing and they each have an hourly rate associated with them and the company or person purchasing the services simply pays them by the hour according to a table that is attached to the agreement. That lays out the hourly rates of each type of employee.

The other type of way a services agreement or master services agreement is structured commercially is what’s called a “Fixed Fee Agreement.” In the Fixed Fee Agreement, it’s exactly like it sounds: there is a single number that you pay and you receive a service in the form of a “deliverable.” So the number might be $50,000 and then, the contract itself will explain what you are getting for your $50,000. In that case, it does not matter how much time any given employee of the seller put into it. All that matters is that at the end of the day they deliver what is described in the contract.

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What are the pros and cons of the 2 primary types of Master Services Agreements?
Now, as between those two different types of agreements, those two different types of commercial structures, the latter (a Fixed Fee Agreement) is much more fertile ground for dispute and litigation because what you’re doing is you’re essentially promising to deliver a certain thing, oftentimes by a certain date, and it’s very common for there to be a dispute about whether or not the seller of the services actually delivered that certain thing, what the buyer thought they were buying, and the devil was really in the details here. You also have the incredibly common situation of the seller missing the deliverable due date. So the contract itself needs to be very carefully crafted to get very specific about the actual deliverable that is being delivered, the more specific the better, and getting all of those specifics into the contract can be a fairly time-intensive process. So, the contract itself becomes more complicated and more expensive to produce. That is the downside of that type of agreement. The upside of that type of agreement, for the person buying the actual service, is that they can budget accordingly because they know exactly how much money they’re going to spend. And they also oftentimes know exactly the date on which they will receive the deliverable of the service itself, allowing them to plan business operations on their end that might have a dependency on the deliverable’s existence.

The downside to the first type of master services agreement, under which someone is providing services at an hourly rate, of course, is that the provider of the services is arguably incentivized to take their time and slow down and try to run up the price because, they are being paid by the hour. Now, the upside to a Time-and-Materials Agreement is pretty significant: and that is if the parties, you know, anticipate a lot of changes or they anticipate a lot of unanticipated things (no pun intended), it’s very easy. They have infinite flexibility because they’re paying by the hour so you get halfway into the project and it turns out to be, you know, more complicated than you thought it was going to be? Not a big deal. You just come up with a new scope and, you know, tell them to do X, Y, and Z and they’ll just charge you by the hour for the additional stuff. In contrast, when that scenario pops up in the Fixed Fee Agreement, it’s kind of a disaster. Unless the contract is drafted very carefully, oftentimes you’ll see what are called “change orders” – folks that deal in construction are probably used to that term. Change Order are like a mini amendment or change to the original contract that calls for more money for the person providing the services in an exchange for the additional effort. They will do additional work. And that additional work is described in that in that Change Order.

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How do I know which of the different types a given Master Services Agreement is?
Now, when you read a Master Services Agreement will you see the terms, “Fixed Fee Agreement,” or “Time-and-Materials Agreement?” No, probably not, but attorneys and procurement specialists who work with Master Services Agreements find it useful to categorize them this way because of the significantly different pros and cons each present.

What are the most important parts of a Master Services Agreement on the commercial and operational side of things?
Simple: For Fixed Fee Agreement: how much money, for what in return, and by what date? The main focus here is on “for what in return.” For Time-and-Materials: review the rate table, review the “scope” of the work they think they’ll be doing to ensure it’s broad enough to encompass what’s needed.

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What are the most important parts of a Master Services Agreement on the legal side of things?
Who owns the “deliverable” when the project is done – the copyright? Does the vendor have the right to reuse the deliverable or resell it even if the customer “owns” it? What can the vendor do with the information the vendor learns about the customer’s business during the course of the project after the project is over – must they keep it secret? How much can either party be sued for if something goes wrong? What happens if the vendor decides the contract is vague or ambiguous in the way it describes a given deliverable or step in the process – how does that vagueness or ambiguity get resolved? Do they have to ask the customer to resolve it? Do they just make up their mind by themselves in a vacuum like that guy who remodeled your kitchen when he discovered the refrigerator didn’t fix so he cut the cabinets? What happens when the due date comes and goes with no deliverable in sight? What are the assumptions made about each company’s business that must be true in order for the project to go off without a hitch? What if one of those assumptions proves to be ill-founded?

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